Student loan payments have been on hold since the beginning of the pandemic, thanks to the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), which paused federal student loan payments through September 30, 2021, and temporarily set the federal student loan interest rate at 0%. But starting in October 2021, almost 50 million borrowers nationwide will have to restart their student loan payments. With educational debt higher than ever, a little-known provision in the CARES Act makes it an optimal time to implement a student loan repayment program for your employees.
Before the CARES Act, employer tuition contributions up to $5,250 were tax-exempt, while employer contributions to student loan repayments were taxable. A provision in the CARES Act changed that, allowing employers to provide up to $5,250 in a tax-exempt student loan repayment contribution. Originally, this provision expired on December 31, 2020, but the Consolidated Appropriations Act (CAA), passed by Congress at the end of 2020, extended the benefit through 2025.
This new benefit also comes with some flexibility for employees and employers. Whether the money is paid directly to the employee or the employee’s loan provider, the money is tax-free, which means the employee doesn’t have to pay income taxes on it. The employer also gets a payroll tax exclusion. This flexibility is especially important for employees who may be participating in programs like Public Service Loan Forgiveness. Employees are required to make 120 payments that cannot be reduced by a lump sum payment.
Though the CARES Act repayment program is an especially good deal for employees and employers, many companies have taken other approaches to assist with education costs, allowing their employees greater flexibility based on their individual circumstances. For example, some companies allow employees to redirect their 401(k) match to a loan repayment instead. Another option is to grant a lump sum annually, which can be used for an employee’s own student loan repayment or can be contributed to an employee’s child’s 529 account.
In addition to assisting with your employee’s financial wellbeing, student loan repayment programs can be a perk that helps your organization stand out in a competitive labor market. For a discussion of these programs, contact Employers Council today.